1. Copyright ©2003 by south-Western, a division of Thomson Learning. All rights reserved. Slide 4-1 Opportunities for Distinction: Building Competitive Advantage by Robert Pitts & David Lei Slides prepared by John P. Orr Cameron University Chapter 4

2. Copyright ©2003 by south-Western, a division of Thomson Learning. All rights reserved. Slide 4-2 What you will learn… The three types of generic strategies that can be used to build competitive advantage: –Low-cost leadership –Differentiation –Focus The benefits and costs of pursuing each type of generic strategy Slide 1 of 2

3. Copyright ©2003 by south-Western, a division of Thomson Learning. All rights reserved. Slide 4-3 What you will learn… The rise of mass customization as a new strategy The value of quality as a key pillar of any new strategy The evolution of strategic considerations over a product’s life cycle Slide 2 of 2

4. Copyright ©2003 by south-Western, a division of Thomson Learning. All rights reserved. Slide 4-4 Ex. 4-1. Nordstrom’s Differentiation from Department Store Chains Infrastructure Human Resource Management Technology Development Procurement PRIMARY ACTIVITIES Inbound Logistics OperationsOutbound Logistics Marketing / Sales Service SUPPORT ACTIVITIES Reprinted/Adapted with the permission of The Free Press, a division of Simon & Shuster, Inc., from COMPETITIVE ADVANTAGE: Creating and Sustaining Superior Performance, by Michael E. Porter. Copyright ©1985 by Michael E. Porter. Faster inventory turnaround Purchasing in bulk Franchising Smaller stores; higher store density; narrower product line Higher prices; new ad campaign Open longer hours

5. Copyright ©2003 by south-Western, a division of Thomson Learning. All rights reserved. Slide 4-5 Ex. 4-2. Generic Strategic Approaches to Build Competitive Advantage Low-Cost Leadership Differentiation Cost-Based Focus Differentiation- Based Focus Competitive Advantage Defined by CostDefined by Distinctiveness Industry wide (Broad) Specific Niche or Segment (Narrow) Target Market

6. Copyright ©2003 by south-Western, a division of Thomson Learning. All rights reserved. Slide 4-6 Ex. 4-3. Competitive Advantage Based on Low-Cost Leadership Infrastructure Human Resource Management Technology Development Procurement PRIMARY ACTIVITIES SUPPORT ACTIVITIES Centralized cost controls Intensive training to emphasize cost savings means; encourage employees to look for new ways to improve methods Economies of scale of R&D and technology development; learning and experience amortized over large volume Purchasing from numerous sources; strong bargaining power with suppliers Large shipments; massive warehouses Economies of scale in plants; experience effects Mass marketing; mass distribution; national ad campaigns Bulk or large order shipment Centralized service facilities in region Inbound Logistics OperationsOutbound Logistics Marketing / Sales Service Reprinted/Adapted with the permission of The Free Press, a division of Simon & Shuster, Inc., from COMPETITIVE ADVANTAGE: Creating and Sustaining Superior Performance, by Michael E. Porter. Copyright ©1985 by Michael E. Porter.

7. Copyright ©2003 by south-Western, a division of Thomson Learning. All rights reserved. Slide 4-7 Ex. 4-4. Competitive Advantage Based on Differentiation PRIMARY ACTIVITIES Inbound Logistics OperationsOutbound Logistics Marketing / Sales Service SUPPORT ACTIVITIES Reprinted/Adapted with the permission of The Free Press, a division of Simon & Shuster, Inc., from COMPETITIVE ADVANTAGE: Creating and Sustaining Superior Performance, by Michael E. Porter. Copyright ©1985 by Michael E. Porter. Infrastructure Human Resource Management Technology Development Procurement Try to coordinate activities tightly among functions; build quality into organizational practices Heavy R&D expenditures to make distinctive or even unique products; refinement of high quality manufacturing and technology processes; emphasis on excellence, world class quality Treat employees as special team members; emphasize design incentives to promote quality Selective purchasing from best or world-class suppliers. Use of best materials, parts and components Extremely fine quality manufactured workmanship emphasized Fast delivery to distributors; extra care in packaging and transport Special, distinctive ads; Technical sales and know-how High emphasis on treating customer as special individual; fast, special service

8. Copyright ©2003 by south-Western, a division of Thomson Learning. All rights reserved. Slide 4-8 Focus Strategies Advantages Can carve niche against larger rivals Firm can improve cost, differentiation factors Can expand product to other niches Disadvantages Market niche may shift Technology change may redefine tastes Technology may help broad-line rival move into prize niche

9. Copyright ©2003 by south-Western, a division of Thomson Learning. All rights reserved. Slide 4-9 Mass Customization The capability to produce a growing variety or range of products at reduced unit costs. Mass customization is a strategic competitive weapon that helps firms to expand their range of product offerings without incurring the high costs of variety.

10. Copyright ©2003 by south-Western, a division of Thomson Learning. All rights reserved. Slide 4-10 Mass Customization for Best Value Advanced manufacturing technology Modular product designs Internet-driven distribution systems New market segmentation techniques

11. Copyright ©2003 by south-Western, a division of Thomson Learning. All rights reserved. Slide 4-11 Ex. 4-5. The Relationship Between Quality and Competitive Advantage Opportunities for differentiation Opportunities for differentiation Market share Market share Quality emphasis Quality emphasis Competitive advantage and high profitability Competitive advantage and high profitability

12. Copyright ©2003 by south-Western, a division of Thomson Learning. All rights reserved. Slide 4-12 Ex. 4-6. The Impact of Product Life Cycle on Competitive Advantage Slide 1 of 4 FactorIntroductory Stage Nature of rivalry Limited focus on competitors; product is center of attention Nature of entry Pioneering firms define industry Product technology Emerging, untried technology. No dominant design is set in most cases Process technology General-purpose equipment and tools for flexibility Marketing emphasis Focus on innovators; volatile prices that have no set level Investment intensity Very high – needed to build business Profitability levels Generally unprofitable, lots of cash needed

13. Copyright ©2003 by south-Western, a division of Thomson Learning. All rights reserved. Slide 4-13 Ex. 4-6. The Impact of Product Life Cycle on Competitive Advantage Slide 2 of 4 FactorGrowth Stage Nature of rivalry Firms stake out key positions in market Nature of entry Large scale entry by firms seeking profit Product technology Competing designs hope to set industry standard Process technology Growing investments in special tools/assets Marketing emphasis Build growing product and brand awareness; prices begin to decline Investment intensity Massive expenditures to reinforce position Profitability levels Moving to higher profits; cash flow negative or uneven

14. Copyright ©2003 by south-Western, a division of Thomson Learning. All rights reserved. Slide 4-14 Ex. 4-6. The Impact of Product Life Cycle on Competitive Advantage Slide 3 of 4 FactorMaturity Stage Nature of rivalry Firms try to survive shakeout; many exit or fail Nature of entry Growth slows and entry is less attractive Product technology Dominant design for industry, few modifications Process technology Emphasis on efficiency and volume production; high automation Marketing emphasis Promote to as many segments as possible; prices are more stable Investment intensity De-emphasis on adding new capacity Profitability levels Peak profits; cash is high

15. Copyright ©2003 by south-Western, a division of Thomson Learning. All rights reserved. Slide 4-15 Ex. 4-6. The Impact of Product Life Cycle on Competitive Advantage Slide 4 of 4 FactorDecline Stage Nature of rivalry Remaining firms seek to reduce intensity of competition Nature of entry Few, if any, new entrants Product technology No real product change Process technology Processes do not change; may become exit barrier if rigid or capital-intensive Marketing emphasis Emphasis changes to preserving existing share position. Prices steady or declining Investment intensity Begin gradual exit and even divest activities Profitability levels Profits decline; cash flow declining rapidly

16. Copyright ©2003 by south-Western, a division of Thomson Learning. All rights reserved. Slide 4-16 Ex. 4-7. Life Cycle Dynamics and Competitive Advantage in the Semiconductor Industry Product concepts Creativity Design capabilities New technologies or methods (favors smaller firms early on) Stage of Product Life Cycle Introductory Growth Mature Type of Distinctive Competence or Skill Needed Manufacturing skills Process technology Process refinements Cost-based drivers (favors larger firms over time)

17. Copyright ©2003 by south-Western, a division of Thomson Learning. All rights reserved. Slide 4-17 The Value Chain Template PRIMARY ACTIVITIES Inbound Logistics OperationsOutbound Logistics Marketing / Sales Service SUPPORT ACTIVITIES Reprinted/Adapted with the permission of The Free Press, a division of Simon & Shuster, Inc., from COMPETITIVE ADVANTAGE: Creating and Sustaining Superior Performance, by Michael E. Porter. Copyright ©1985 by Michael E. Porter. Infrastructure Human Resource Management Technology Development Procurement